Apple Pay is coming to the big 4 banks, whether they like it or not

Around age 7, Rebecca Bloomwood’s friends stopped believing in magic. But instead of dispensing with her own belief, after seeing adults use ‘magic cards’ to get everything they wanted, Rebecca, the protagonist of Confessions of a shopaholic, found confirmation of the existence of a mystical power.

Today’s shopaholics don’t use ‘magic cards’ to buy their Gucci bags and green scarves. Instead, they reach for their smart phone.

Smartphone payments are set to become the next big battleground in retail banking. According to a 2015 Deloitte report, 4-in-5 Australians own a smart phones - 15 million in total – and more and more of them want to use their phone as a payment device.

The move makes perfect sense. Of those 15 million devices, around 41% (6.1 million phones) are iPhones. According to ANZ, more than two thirds of the users of the bank’s GoMoney app access it via an iPhone. The same kind of figures are likely to apply to its competitors.

So why didn’t CommonwealthBank (ASX:CBA), NAB (ASX:NAB) and Westpac (ASX:WBC) beat ANZ to the punch? The simple answer is to protect their fees.

In America, Apple earn 15 cents on every $100 spent through Apple Pay by retaining a sliver of the banks’ interchange fee. The banks pay Apple, not the customer or merchant. In Australia, the RBA is pushing to set interchange fees at 30 cents for every $100 dollars spent using credit and debit cards. If Australia adopted the same terms as Apple has negotiated in the US, Apple would keep 50% of the interchange fees.

For now, most banks are resisting Apple’s push because of the money at stake. But they may not be able to hold out for much longer.

Reports suggest ANZ’s move has led to a surge of credit card applications. If this continues it will only be a matter of time before the others follow suit. Even in banking, nothing good ever happens to a business that prevents customers from getting what they want.

The banks find themselves in an unusually weak position. Apple can effectively ban the banks from launching competing applications through its App Store. Moreover, the loyalty of iPhone users means that a battle between Apple and credit card providers is likely to be short and painful for the banks.

Apple will, of course, need to come to the party. A more attractive fee structure suited to the banks might do the trick. In the scheme of things, it would be a small price to pay for a passive slice of Australia’s credit card industry and, potentially, a foot in the door to a new Apple product – the ‘card-less’ credit card.

In the short term, self-interest should prevail. As much as banks would love to keep their interchange fees to themselves, customers want contactless payments through smart phones. With Apple having a disproportionate number of well-heeled, lucrative customers, the banks will eventually have no choice but to offer Apple Pay or risk losing them to banks that do.

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